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The future of industry funds
lies in member segmentation akin to the financial planning model and
sustainable value propositions that no longer focus solely on growth and price,
writes KRISTEN PAECH.
For
many years now, industry funds have been indiscriminate in their campaigns to
grow their membership bases, differentiating through price and a virtuous “no
commissions paid to financial advisers” policy. This strategy served them well
during a high growth environment where costs were low, inflows were strong and steady
and members were contentedly achieving double digit returns. But with
consolidation afoot and the underlying growth rate of industry funds slowing,
Tria Investment Partners has questioned the sustainability of such models, and
suggested the future lies in redefining value propositions better tailored to
members’ needs.
In its 2008-09 Industry
Fund Review, Tria predicts the rate
of net annual inflow into industry funds will halve from about 10 per cent of
their total assets to 5 per cent of assets within the next few years. Industry
fund assets stood at $194 billion at 30 June 2008, up only fractionally on 2007’s
$191 billion due to falling investment markets. Retail assets by comparison
were down from $371 billion to $342 billion, the report notes. Andrew Baker,
managing partner at the firm, says after four years of growth driven by
investment returns, the pendulum has begun to swing the other way.
The industry
fund “redemption rate”, which currently runs at about 7.5 per cent annually, is
gradually drifting up as members age and start to retire. The report notes
member contributions added 2.2 per cent of assets in 2008 – well down on 2007’s
4.3 per cent but comparable to 2006. Baker says employer contributions could
come under pressure from the cut in maximum deductible contributions announced
by the Rudd government in the 2009 Federal Budget. And net transfers resulting
from smaller funds rolling into larger funds, which last year contributed 4 per
cent of the 10 per cent net inflow, will eventually dry up.
Furthermore, rising
costs, the need for scale and bigger and better management teams, and poor
investment returns are driving consolidation in the sector. Baker believes funds
experiencing slowing or negative growth and upward cost pressure will be forced
to raise their fees, and will be unable to keep up with the services that
members will increasingly demand. “The sector is starting to mature, the organic
growth rate is starting to slow, and the disparity between funds is going to
become pretty sharp in the next five years,” he says. “In an environment where
you’ve got no growth and rising costs it’s a bit disastrous.
One of the big
challenges for industry funds is a lot of them haven’t had to have sustainable
value propositions before, because the money just rolls in. “If the money’s not
rolling in the way that it did and the growth is not there, then you’re going
to have to have some kind of special value proposition for your membership and
that’s going to be a new skill for a lot of these funds.” There are the
exceptions; AUSCOAL, for example, is targeted to the particular needs of coal
miners, while religious funds such as Catholic Super & Retirement Fund and
Christian Super target specific clusters of the community.
However Baker says
the old catchcry ‘We know our members best because we’re the fund in that
sector’ is not going to hold up in the new market environment. Key to providing
better targeted services for members is the ability of funds to really
understand their members’ needs. Baker says industry funds must segment their
membership bases, similar to the way the financial planning profession segments
its client base.
Doing this would give funds the opportunity to determine what
type of members they’re trying to attract, and tailor their services
accordingly. “Up until now it’s been growth, growth, growth; we want as many
members as possible,” Baker says. “In a consolidating world I’m not sure you
want growth for growth’s sake any more. Funds will become more discriminating about
the kinds of members that they want. That’s good in some ways; they’ll start to
target services and products towards those members, so you’ll see better
products and services, but they’ll probably become more conscious of people who
are there, for example, just for the insurance.”
As funds begin to consider new
ways to differentiate their offerings, the focus has shifted from accumulation
to retirement. Baker says funds are starting to think about how to retain
members post-retirement, what type of products should be developed to meet
their specific needs and whether the default retirement product is the same as
the default accumulation product. “That’s a pretty interesting discussion, and
it’s probably not [the same product],” he says. “[Funds] have done a tremendous
job of building a mass market accumulation product but in a relative sense they’re
really nowhere in retirement.
So they tend to lose a lot of their members
before retirement; their retirement products are pretty early in their
development, member advice models are pretty early in their development, so
many of the funds would recognise that they’ve got a lot of work to do there.” The
$12 billion Sunsuper is one fund that’s recognised the need to implement management
processes to help members stay on through retirement. In May, the fund rolled
out a newlook Retirement pension dubbed the Today and Tomorrow strategy, which provides
an up-front two year supply of cash while investing the remaining balance in
high income-yielding shares and stable assets such as property and infrastructure.
Tony Lally, chief executive officer of the fund, says member retention into retirement
will be a big growth area for industry funds in the next five to 10 years. “In
the past, losing members wasn’t such a big problem because the balances weren’t
very big and industry funds just focused on accumulating assets for members,”
he says. “As the balances are getting bigger, it’s more important to retain
members into retirement.” Since revisiting its member advice model and placing
a stronger emphasis on retirement, Sunsuper has improved its member retention
post-retirement.
“In the last 12 months we’ve retained approximately 50 per
cent of the assets of members who reached retirement age,” Lally says. “In the
year ended June [2009] we sold four times as much in allocated pensions as we
did two years ago. By focusing on this and putting effort into it, we have
dramatically increased the retention of assets and the sales of the allocated
pension to members in retirement.” According to Lally, member segmentation, which
the fund has been doing for the last two years, has allowed Sunsuper to tailor
its messages to different members.
“In the past, before you had good segmentation
tools, you’d be looking to do three or four campaigns a year; we can do one a
week now,” he says. “One week we did two: just before and just after the Budget.”
As industry fund models evolve and increase in sophistication, Baker says the
super industry will turn into what he calls a “normal industry”, where a small
number of large players compete on price and a larger number of smaller firms
compete on value propositions based on more than just low cost.
“Industry funds
have been able to differentiate very sharply on price; they’ve got the ‘Big W’
positioning: friendly, everyday low price,” he says. “That’s drifted a bit in
the last few years – it’s nowhere near as sharp as it was. Award modernisation,
increasing choice and competition for more valuable members are changing the
status quo. The transformation to more of a marketing-led business is not an
easy one.”
